Keshi CO 12/14 Part a Swap

Without the swap, if borrowing fixed then Keshi would have paid 5.5% There is a benefit by swapping of 0.8%, of which Keshi gets 70% which is 0.56% less charge of 0.10% = 0.46% Therefore Keshi must end up paying 5.5% - 0.46% = 5.04%. But because of swapping, Keshi borrows floating and pays L + 0.4% To make things 'work' the counterparty will pay L to Keshi. So now Keshi is paying L + 0.4% - L = 0.4% Keshi has to end up paying a total of 5.04% (as above) of which 0.1% is charges - the remainder is 4.94% So, to make things 'work' completely, Keshi must pay the counterparty 4.94% - 0.4% = 4.54%

Thank you so so so much Sir.

You are welcome :-)

Good day sir, How did the gain become 8% and not 10% on the swap

If K borrows fixed at 5.5% and the other borrows floating at L+0.3%, then the total comes to L + 5.8% If K borrows floating at L+0.4 and the other borrows fixed at L+4.6% then the total comes to L + 5% So what they should do is the second option and swap i.e. pay each others interest. Between then they will save 0.8% of which K will get 70% which is 0.56% saving. Without the swap Keshi pays fixed interest of 5.5%. With the swap they save 0.56% and so end up paying 5.5 – 0.56 = 4.94%. In addition they have to pay 0.1% to the bank which gives a final total of 4.94 + 0.1 = 5.04%. The free lecture on swaps will help you.